Study of Related Companies
March 1996
ROBSON RHODES
Study of Related Companies
for
Higher Education Funding Council for England
Reference RR 1/96
March 1996
(Contents)
DEFINITIONS
HEFCE or The Funding Council The Higher Education Funding Council for England.
Guidelines Recommended Practice Guidelines.
Institution Universities and Higher Education Colleges in England.
Related Company or Company Any company over which the Institution has control.
Governor Member of Council, Board or Governing Body.
SCOP Standing Conference of Principals.
CVCP Committee of Vice Chancellors and Principals
BUFDG British Universities Finance Directors Group
Technical Panel A committee of representative members from the Funding Council, SCOP, CVCP and Robson Rhodes with responsibility for overseeing and validating the study.
UNICO The University Companies Association.
CONTENTS
SECTION
10 Compliance with Tax Regulations
APPENDICES
D Guidelines (excluding Appendices)
E Summary of Company Activities
Letter of Introduction
Our ref: ES/DLB12 March 1996
The Higher Education Funding Council for England
Northavon House
Coldharbour Lane
Bristol BS16 1QD
For the attention of the Chief Auditor
Dear Sirs
Study of Related Companies
In January 1995 you commissioned Robson Rhodes to carry out a study of the related companies within the higher education sector in England. The decision to undertake the study was as a result of the conclusions drawn by the National Audit Office from their review of the financial health of higher education institutions in England, carried out in November 1994. The National Audit Office suggested that the Funding Council might consider drawing out some lessons learned from the experience of institutions when setting up related companies, for the benefit of the sector as a whole.
The purpose of this report is to summarise our findings from the study which we believe will be of interest to the Funding Council. As part of our work we have also prepared, in conjunction with the Funding Council, a set of Recommended Practice Guidelines which distils our findings into a format which may be of value to education sector Institutions and their related companies. This report should be read in conjunction with those Guidelines.
Yours faithfully
ROBSON RHODES
Section One
EXECUTIVE SUMMARY
Summary1.1 All the Institutions we have visited during the course of our work (set out at Appendix A) have been fully aware of the need to properly control and monitor the activities of their subsidiary companies. All had procedures in place to satisfactorily carry out this monitoring function.
1.2 In every case we found senior officers of the Institution actively involved either on the Board of the companies or as part of a supervising committee charged with the responsibility of monitoring the companies. In the best cases we found well understood formal systems of monitoring and controlling the activities of subsidiaries, involving the regular production and review of relevant management information. However, it was more normal to find a less formal, more ad hoc, approach in operation.
1.3 The current practices in respect of related companies often mirrored recommended practices, although few Institution/companies exhibited recommended practice in all respects. At this stage we do not believe that it is appropriate for the Funding Council to seek to implement a detailed set of controls for the sector, although we recommend that Guidelines should be introduced and with which the Institution should be encouraged to comply. The Funding Council should keep the position under review and we suggest a follow up review should be carried out in due course to assess compliance.
Key Recommendations
1.4 Our key recommendations in respect of the control and management of the companies within the sector are included within the Checklist of Recommended Practice. We have included this at Appendix D. However, there are further recommendations which are outside of the scope of the Guidelines and on which the Funding Council may wish to consider issuing further guidance to the sector. These are set down in detail in Sections Four to Twelve and are summarised below:
* There is a lack of consistency in the basis on which shared costs are charged back to related companies and/or recharged to the Institutions which makes it difficult to accurately assess the performance of individual companies. This reflects the difficulties experienced by the Institutions in assigning overhead costs to particular activities.
If a reasonable estimate of the cost, including overheads, is not used then it is likely that both the Institution and the company management will get a distorted view of the true profitability and consequently may make sub-optimal decisions on resource allocation.
The Funding Council should consider giving guidance on costing methodologies which may be appropriate to the sector; in particular setting down a suitable basis on which shared costs, especially overheads, should be recharged from the
Institution (Section Seven).
* The Funding Council may wish to re-emphasise its guidance on the ownership of and responsibility for intellectual property rights which may arise from work funded by the Institution (Section Eight).
* In Section Twelve we consider the requirements of the Funding Council in respect of the use of public funds. We suggest that the Funding Council could give useful additional guidance to clarify current practices on the control mechanisms (for example the role of internal audit) to safeguard those funds.
Section Two
SUMMARY OF SECTOR
Summary of activities2.1 We set at Appendix E, and in the exhibits on pages 5 and 6, a summary of the company activities within the higher education sector for the years ended 31 July 1993 and 1994. Salient features are:
* the number of active companies have increased from 146 in 1993 to 173 in 1994;
* total turnover of these companies has increased from £143 million in 1993 to £172 million in 1994;
* net profit before covenant has increased from £4.9 million in 1993 to £8.8 million in 1994;
* net assets of the companies have increased from £9.3 million in 1993 to £27.6 million in 1994;
* the liability of the Institutions has increased from £27.6 million to £50.1 million in 1994.
2.2 We have excluded the Oxbridge publishing companies and BES companies, as these are felt not to be representative of the sector.
2.3 Companies not consolidated into the parent Institutions own accounts, and also companies which have taken advantage of the small companies filing exemptions have also been excluded (information not available to us).
2.4 For the purposes of comparison, we have analysed activities into broad categories. This has been based on the information contained within the statutory accounts. In some cases companies may carry out more than one activity and in those cases there may be some mis-analysis to the numbers as set down. However, these are unlikely to be significant to the overall conclusions as set down below.
Consultancy and research
2.5 Consultancy and research was the most significant company grouping, with turnover of £50 million (1993: £50.0 million). The average turnover of each active company also remained consistent at £1.0 million (1993: £1.1 million). Net profit before covenants also remained steady, falling from £2.2 million in 1993 to £2.0 million in 1994.
2.6 Although there were significant liabilities due to the Institutions, it is important to recognise that the establishment of these companies may represent more to the Institution than simply a vehicle from which to generate a financial return. Technological research, and the development of pure research activities carried out within the Institutions to be marketed within the commercial sector may form part of the Institutions normal activities but have been hived down into a company for tax planning reasons.
Conferences, teaching and training
2.7 Conferences, teaching and training activities were the second most significant grouping by activity, with turnover totalling £41.8 million (£32.5 million). Average turnover per company in this category exceeded £1 million, and has increased marginally from the previous year.
2.8 This sector achieved a profit before covenants to the Institution of £1.7 million. This is a marked improvement from the previous year when losses of £1.4 million were reported. Liabilities to the Institutions are also significant, amounting to £11.1 million (1993: £8.5 million).
2.9 This group of companies has in the main been established to protect the Institutions charitable status from activities which may not always be deemed to be a "non profit" and in accordance with the primary objectives of providing education. Examples of this are the letting of student accommodation during vacation periods and the rental of conference facilities to third parties.
2.10 We note that not all Institutions have chosen to establish companies in respect of these activities and we therefore surmise that these Institutions maintain these activities within their own accounts. Separating the activities into a company therefore highlights its performance but may not be indicative of any worse control or performance than an Institution where a company has not been used. It is therefore difficult to make any meaningful comparison between Institutions.
General trading activities
2.11 Activities within this sector are extremely diverse and cover a wide range of activities, including software retailing, engineering and farms. These companies will be largely established as tax planning vehicles to enable trading profit to be covenanted to the Institution to take advantage of its tax exempt status and to avoid any possibility that the Inland Revenue could seek to challenge their charitable status.
2.12 General trading activities amounted to a turnover of £34.0 million. This represents a significant increase from the previous year when turnover of £28.1 million was achieved.
2.13 Net profit before covenant fell from £1.7 million in 1993 to £1.5 million in 1994. This represents an average decrease of some 15% per active company.
Utility companies
2.14 The utility companies, with turnover of £21.8 million (1993: £14.8 million), are established in the main as tax planning vehicles to enable irrecoverable VAT to be avoided. Two companies within this category actually generate their own power and sell any excess to the National Grid.
2.15 Net profit before covenants amounted to £2.5 million in 1994, an increase from 1993 of some 28% (1993 : £1.9 million). Although several companies within this sector do trade commercially, for example the sale of excess power to the National Grid), the profitability of the companies in this sector is a result of the costs of administration being undercharged to the parent institution. Any profits will be transferred back by means of a deed of covenant.
2.16 Typically these companies often have limited purpose, and may therefore be classed low risk. Often payment will be made in advance by the Institution to the company and thereby prepurchase the utility. The money may then be loaned back to the Institution. Although there may therefore be significant liabilities to the Institution these will often be matched with a corresponding asset (cash, or prepayment debtor).
Science Parks
2.17 Only two Institutions had control over science parks at 31 July 1994, although two others had significant interests in parks but did not exercise control. Turnover amounted to £6.3 million which is consistent with the previous year (1993: £5.8 million). The net profit before covenants was marginally lower, from £0.7 million in 1993 to £0.6 million in 1994. There were minimal liabilities outstanding to the Institutions.
Liabilities to Institutions
2.18 Liability to the Institutions amounted to £50.1 million. This is a significant increase from 1993 when the liability was £27.6 million. The increase is a reflection of the increased activity of the companies and also the funding difficulties which the companies incur through covenanting up the profits.
2.19 From the companies we have reviewed there is no evidence that there is any potential risk to the HEFCE through company failure. However,each Institution/Company situation is unique and liability to the sector should therefore be individually assessed.
Section Three
VISITS TO THE INSTITUTIONS
Introduction3.1 We set out at Appendix A details of the Institutions we have visited. All of our visits were carried out by partners or senior managers, as set out in our proposal to you. The visits were initially planned to last approximately one day, although where necessary additional follow up visits were made.
3.2 At each Institution we met with senior representatives of the Institution and subsidiary companies. Our findings are derived from the discussions with those individuals, based on our Site Visit Checklist. This checklist had previously been approved by the Technical Panel and a copy is included at Appendix C.
Findings
3.3 We set out in the sections below the findings from our visits to the Institutions. Our work was directed to the specific objectives which were agreed by the Technical Panel as part of the Site Visit Checklist and we set these out below:
* To determine that the establishment of the Company/group has been properly planned and controlled.
* To determine that the Institution exerts appropriate influence over the affairs of its Related Companies.
* To establish that the Related Company's performance has met its budget and objectives.
* To establish that the Related Company's results are a fair reflection of its activities.
* To establish that the Institution controls and monitors its liabilities to the Related Companies.
* To ascertain how profits from the Related Companies are routed back to the Institution.
* To establish whether the Institution monitors the compliance of its Related Companies with the requirements of the taxation authorities.
* To establish whether the Institution has any liabilities in respect of employees of the Related Companies.
* To establish that the institution has due regard for the issue of public accountability.
* To ensure that there is adequate review of the Institution investment in its Related Companies by both the external and internal auditors.
3.4 We discuss each of the above in Sections Four to Twelve below. We have already incorporated many of our recommendations into the Guidelines which have been discussed in draft with you and are included at Appendix D. In the subsequent sections we set out how the Guidelines will assist the Institutions in dealing with these objectives.
3.5 We set out separately in each section any further recommendations which are outlined in the scope of the Guidelines but which we believe should be considered by the Funding Council.
3.6 Each of the following sections (Four to Twelve) is set out as follows:
* the objective;
* the criteria we used to consider the objective;
* our findings;
* the relevant Guidelines and how these should be applied to the objective;
* any other recommendations outside of the scope of the Guidelines and which in our view should be considered by the Funding Council.
3.7 The objectives contained in the Checklist in respect of the potential tax exposure and the involvement of the auditors have been included in other sections where relevant.
Section Four
ESTABLISHMENT
Objective4.1 To determine that the establishment of the company/group has been properly planned and controlled
Summary
4.2 Where subsidiary companies have been set up in the recent past we found that some form of business planning had been undertaken for consideration by the Governors or their delegated authority. Long established companies were in most cases not discussed as many of the individuals met were not involved in the setting up of the companies and were therefore unable to comment.
Although the format and style of the plans varied significantly, from the evidence made available to us it is evident that the establishment of most companies has been planned and controlled. The extent of this planning and control, however, varied.
Criteria
4.3 We have sought to establish whether:
* the reason for establishing the company was properly considered;
* a suitable business plan has been prepared for each company;
* appropriate authorisation has been obtained;
* suitable independent professional advice was taken.
Findings
4.4 With only a few exceptions we were assured that business plans are prepared by the Institutions and companies as a matter of course. The exceptions were companies which were either dormant or where the purpose and performance was clearly understood by the Institution, for example a company set up for VAT planning purposes (these companies in the main housed transactions which previously had been carried out within the Institution itself. The management of these companies will be Institution officials).
4.5 In some cases where the company had been in existence for a number of years, and where the personnel at the Institution/Company had changed since the Company was set up, we were unable to confirm that an authorised business plan had been prepared. This is a reflection of the passage of time and is not an indication of a lack of current control.
4.6 We found wide variations in the quality of the business plans produced by the companies. Some amounted only to a minimal summary budget of expected income and costs, while the best examples were fully documented strategic plans which were informative and valuable documents.
4.7 There was also a significant variation in the subsequent review and update of the business plan. We found examples where a comprehensive review of performance against the business plan and forecasts was carried out on a regular basis. However, in most cases management reviews were restricted to financial budgeting.
4.8 Most plans were approved by the Governors or their delegated authority, for example the Finance Committee or its equivalent, or the Board of a holding Company for all of the subsidiaries where this existed.
4.9 In all cases appropriate independent professional advice was taken to ensure that the company was legally set up and protected the charitable status of the Institution. We noted that little use was made of professional advisers to assist the Institutions in validating the business plan, although most had outside non-executive directors with relevant experience to advise.
Recommended Practice Guidelines
4.10 Most institutions have prepared a business plan of some description where it was appropriate to do so. These plans were authorised by the Institution and, through annual budgeting procedures, may be monitored. However, the quality of the business plans varied considerably with no common model having been adopted. We suggest in our Guidelines that the business planning process should be carried out in two stages:
* a preliminary consideration, which includes consideration of whether a company is the best vehicle for the intended purpose of the Company and the appointment of a Nominated Officer (see Section A);
* a comprehensive business plan once the formation of the Company has been authorised. This would include consideration of such matters as the financing requirements, analysis of the risks and sensitivities, the intended returns of the Company and considerations of intended exit opportunities (see Guideline B1).
4.11 A business plan to be of value to both the management of the Company and the Institution should be updated and reviewed on a regular basis. It should be a document which as a minimum should explain the activities of the Company, the expected returns, an assessment of the risks and the financial requirements. It should therefore be able to provide the Institution with sufficient information to be able to make the decision to continue its investment in the Company.
We recommend in our Guidelines that as part of the assessment of company performance the business plan should be regularly updated, we would suggest on an annual basis, to remain appropriate to the operations and environment of the company (see Guideline D4).
4.12 There is often a lack of clear responsibility within the Institution for the management and control of the companies. In most cases this responsibility has fallen to the Institution Finance Director. However, in many instances the Finance Director may also be a director of the Company and will therefore have a potential conflict of interest. We recommend in our Guidelines that a Nominated Officer should be appointed (see Guideline A12).
The Nominated Officer should oversee the companies and formally report to the Institution. His reporting duty should be set down by the Institution and he should not have any executive responsibility within the Company itself. His role should be formalised in the Memorandum of Understanding between the Institution and the companies (see Guideline A2 and the introduction).
4.13 We recommend in our Guidelines that the Institution should validate the business plan (see Guideline B2). As part of this validation process we suggest appropriate professional advice should be taken. This advice may be from a suitably qualified individual within the Institution or from third party professionals. The purpose of this is to ensure that the business plan is fit for purpose and which the Governors or their delegated authority can therefore demonstrate that they have taken due care when authorising the investment.
4.14 We have included in our Guidelines an appendix setting out those matters which it may be appropriate to include within a business plan. We believe this will be of use to the Institutions in preparing their business plans and we hope will provide a useful common model to enable a consistently high standard to be achieved.
Other Recommendations
4.15 We have noted that many Institutions do not integrate the Company's forecast results into the Institutions own budget. Such an integration may assist the Institution to fully understand their overall financial position.
Section Five
APPROPRIATE INFLUENCE
Objective5.1 To determine that the Institution exerts appropriate influence over the affairs of its Related Companies.
Summary
5.2 The Institutions visited maintained close control over their related companies and were fully aware of the need for care and diligence.
5.3 The level of reporting to the Institution is in the main satisfactory, although the mechanism for so doing and the authorisation procedures are often unclear and not documented. Procedures for dealing with potential conflicts of interest which may arise through officers of the Institution also being directors of the company should be set down by the Institution.
5.4 The diagram below sets out in summary a possible reporting/control structure which the Institution may wish to adopt. This shows the respective roles of the Governors, Audit Committee and Nominated Officer.
Criteria
5.5 We have sought to establish whether:
* the management of the Company is fit for purpose;
* there is adequate reporting by the company to the Institution;
* there is a clearly set down basis to determine the remuneration of the company officials;
* there are suitable procedures in place to address any conflicts of interest which may arise through officers of the Institutions being directors of the company.
Findings
5.6 In all the Institutions we visited we found the Boards of the Related Companies comprised representatives from both the Institution and from independent third parties. In many cases this level of control goes beyond that which we would expect a company Board to include and may even be restrictive to the executives of the Company in carrying out their duties.
5.7 Three institutions we visited had set up an intermediate holding company. The Boards of these holding companies comprised relevant officers from the Institution together with the Chairmen/managing directors of the trading companies. This provided a specific focus for control and reporting and also a sharing of experience between the individuals within the companies. Matters such as approval of budgets and authorisation of capital expenditure would be the specific responsibility of this holding company.
5.8 All significant trading companies prepared management accounts usually on a monthly basis, although in some cases this was only carried out quarterly. Usually these accounts are presented to the Finance Committee or its equivalent within the Institution. However, in many cases this arrangement appeared ad hoc, and the approval procedures were not always clearly set down.
5.9 Reporting to the Audit Committees varied widely. In some Institutions the reporting of the external accounts and issues arising were presented with the Institutions own accounts. In most cases the same auditors were used to audit the Institution and its subsidiaries and it was left to those auditors to decide whether or not to report any issues on subsidiary companies to the audit committee.
5.10 Although many institutions have a "designated officer" to take responsibility for managing the Company, he is often involved in an executive capacity. In addition there are not clearly laid down responsibilities. Without a clear understanding of the role and its responsibilities the value of this position both to the company and to the Institution may be overlooked.
5.11 Only one Institution visited had clearly set down procedures for addressing any conflict of interest which may arise as a result of the position of an officer of the Institution being a director of the Company. Others said there were "understood" procedures in the event that a conflict should occur.
Recommended Practice Guidelines
5.12 We recommend in our Guidelines that each Board of directors is considered for its suitability, to enable the Company to maximise its performance. The Board needs to include an appropriate balance of executive, non-executive and operational management (see Guideline B12).
5.13 Although there is adequate influence being exerted by the Institution over the affairs of the companies, this is often carried out informally. There are often no formal guidelines set down to make clear the respective responsibilities of individuals. In addition, there were situations where there was a risk of shadow directorship through members of the Institution holding executive positions in companies.
In our guidelines we suggest that a Memorandum of Understanding should be drawn up and agreed by the Institution and the Company, which would set down and make clear the agreed responsibilities of individuals within the Institution and the Company itself (see Guideline B11).
5.14 In addition the influence of the Institution over the companies could be practically improved through setting down clear reporting requirements and vesting responsibility for the control and reporting to an individual from the Institution. In our Guidelines we refer to this individual as the "Nominated Officer".
In many cases Institutions have established committees to oversee their investments. These are often cumbersome and may not be conducive to enabling appropriate and timely action to be taken when required. We accept that there may be a role for these committees to play; however, we believe the appointment of the Nominated Officer with clearly set down responsibilities will enable more meaningful information to be relayed to the Institution and prompt action taken when required (see Guideline A2 and Section 4.12 above).
5.15 Some Institution have set up intermediate holding companies which manage investments in subsidiary ventures. This is particularly appropriate in those cases where the investment is into technological innovation, where the Company may at some stage be disposed of, either by sale or flotation. These group structures provide a sound control mechanism and their use should, where appropriate, be encouraged.
5.16 Clear instructions as to how an Officer of the Institution is to proceed in the event of a conflict of interest with his position as company director should be set down in both the regulations of the Institution and his contract of employment. It would also be appropriate to include this within the Memorandum of Understanding. (See Guideline B11).
Other Recommendations
5.17 We have no other recommendations to make in this section.
Section Six
PERFORMANCE
Objective6.1 To establish that the Related Company's performance has met its budget and objectives.
Summary
6.2 In almost all cases annual budgets are prepared for the companies and approved by the Institution. The frequency of the review of the performance of the companies by the Institutions varied, usually being determined by the nature of the activity of the Company and the number of transactions passing through it.
Criteria
6.3 We have sought to establish whether:
* suitable budgets are prepared by the companies and authorised by the Institutions;
* performance is monitored by the Institutions.
Findings
6.4 Annual budgets are prepared in most cases as a routine requirement of the Institution. The exceptions relate to those situations where the activities of the company were previously carried out by the Institution itself and where the Institution has full knowledge and understanding. An example of this would be where a Company has been set up to house the expenditure on heating and lighting (VAT planning).
In these cases the Board of the company will comprise officers of the Company and as the activities will fall part of the Institutions own expenditure budget we believe this is acceptable practice.
6.5 Regular review of performance against budget is carried out by the Institutions, although the frequency of these vary depending on the type of activity and volume of the transactions. In one case the review was carried out on a fortnightly basis, although monthly was more typical in respect of the main trading companies. Budgets are not typically integrated into the overall budget process for the Institution - to ensure consistency and that the companies are considered within the overall objectives of the Institution.
Recommended Practice Guidelines
6.6 We recommend that the objectives of the Company should be clearly set down in the business plan. This should also include the expected return expected by the Institution and provide the basis for the budgeting procedure (see Guideline B1).
6.7 We recommend that budgets should be prepared for all Companies which actively trade with third parties. These budgets should be authorised by the Institution and a procedure implemented to ensure that regular reviews of performance are carried out, with any necessary corrective action being taken on a timely basis (see Guideline B18).
6.8 We recommend that all Companies should produce management information, although the extent and frequency of this information will vary, depending on the type and scale of the company's activities. We therefore recommend that formal instruction should be issued by the Institution as to the content and frequency of the management information produced. In our Guidelines we suggest this should be included in the Memorandum of Understanding (see Guideline B11).
6.9 We recommend that the Institution should review on a regular basis the performance of the Company and understand the results. We suggest that in the first instance this should be carried out by the Nominated Officer (see Guideline D2).
Other Recommendations
6.10 We have no other recommendations to make in this section.
Section Seven
RESULTS OF ACTIVITIES
Objectives7.1 To establish that the Related Companies results are a fair reflection of their activities.
Summary
7.2 All of the Related Companies included in our study were subject to annual audit and there were no issues disclosed in their statutory accounts concerning the fair reflection of their activities. However, the basis for recharging shared costs, especially overheads, by the Institutions to the Companies varied across the sector making comparison of performance difficult.
Criteria
7.3 We have sought to establish whether costs are recharged appropriately from the Institution to the Company and that the results of the Company are therefore a fair reflection of their activities.
Findings
7.4 In many cases there was no formal mechanism to define the net financial contribution which the related companies are making to the Institution as a whole.
7.5 Trading companies were recharged by the Institution for any direct costs incurred, for example payroll costs.
7.6 Other costs, such as rents were normally recharged to the Company on a predetermined formula, for example 5% of turnover. These recharges were based on actual results.
7.7 We found no evidence of time records being maintained by the Institutions staff. Therefore, where officers and staff of the Institution carried out work on behalf of the Company there may not be a fair recharge of the value of the time spent being made. However, we recognise that implementing such procedures may be difficult considering the cultures of the academic institutions.
The potential consequence of this, particularly if the time spent is significant, may be an overstatement of the true profits of the company, matched by a hidden cost to the Institution. It is possible therefore that by this route designated funds may be being indirectly used to finance the companies activities.
Recommended Practice Guidelines
7.8 The Memorandum of Understanding between the Company and the Institution should clearly define the basis upon which the level of contribution is to be ascertained (see Guideline B11).
7.9 The Institution, we suggest the Nominated Officer in the first instance, should take appropriate action to ensure that results of the Company are a fair reflection of its performance; in particular that all costs incurred by the Institution as a result of the activities of its Companies are correctly recharged to the Company (see Guideline D2).
7.10 We recommend in the Guidelines that the basis of recharging costs should be clearly set down and understood. As far as possible it should be based on the actual costs involved and accordingly it may be necessary for each Institution to consider the effectiveness of their current information systems to be able to achieve this. For example, it may be necessary for academics to formally maintain a time record of the time they spend on the Company affairs to enable an accurate recharge to be made. (See Guidelines B1 and D2).
Other Recommendations
7.11 There is no common basis for the recharge of shared costs. It is therefore difficult to obtain a clear understanding of the true contribution being made by the Companies to the Institution and as a result it is difficult to carry out meaningful comparison of performance between companies across the sector.
7.12 Overhead recovery is a difficult area to analyse. Levels of contribution will vary between activities and will be influenced by how the Institution chooses to quantify it; for example, non financial benefits may be a significant factor in setting up a company and the effective contribution from these benefits should be considered. Examples of this may be the ability to retain key academic staff or provide a facility to carry out specific research activities which may have a benefit to the Institution in due course.
7.13 As Institutions are not readily able to identify all costs incurred in a transparent and consistent manner, it may be useful for the Funding Council to give guidance on costing methodologies which may be appropriate to the Sector.
Section Eight
INSTITUTE LIABILITY
Objective8.1 To establish that the Institution controls and monitors its liabilities to the Companies.
Summary
8.2 All of the Institutions visited controlled and monitored their liability to, or incurred through, their Related Companies.
Criteria
8.3 We sought to establish whether the Institutions:
* reviewed current and forecast trading and cash flows;
* reviewed realisability of Related Company assets;
* attempted to value research and development.
Findings
8.4 All of the Institutions visited had mechanisms in place to control and monitor subsidiary activities and in particular to control potential liabilities which might be passed back to the Institution. The nature of these controls varied widely. We have noted formal and well established budgeting and review processes, supported by monthly management accounts.
8.5 We have also noted control of Companies by retaining key authorisations within the Institution, for example the approval of all borrowing agreements backed by an annual review.
8.6 In all Companies which traded with third parties we noted that representatives of the Institution met at least twice a year, and often more frequently, to consider the activities of subsidiaries. This was either as members of the Board of the subsidiary, or as members of a Committee of the main Institution charged with overseeing the subsidiaries. Such meetings enabled the Institution to monitor and control liabilities in the subsidiaries.
8.7 For Companies established for VAT planning purposes, and other companies with restricted activities, regular reviews were not considered necessary by the Institution. They were reviewed on an annual basis which, in our view, is appropriate for such Companies as they are controlled on a day to day basis by Institution officials usually the Finance Director.
8.8 We noted that insurance was carried for main risks by Institutions and Related Companies.
8.9 We noted a lack of systems of formal quality control over consultancy and other similar activities. The Institutions visited had systems for reviewing early aspects of a project, such as agreeing the original contract. On the whole they did not have formal requirements for technical peer review or other quality control measures during the rest of the contract.
Failure to deliver against the original contract might lead to litigation against the Institution, a factor recognised by all "mainstream" consulting firms who devote substantial resources to technical reviews and other quality control procedures.
8.10 Each of the Institutions visited relied on the accounts, and in particular, the annual audited accounts, for assurance on the carrying value of the related company assets. Institution representatives on subsidiary boards of directors also had the opportunity to review any issues arising in greater depth.
Recommended Practice Guidelines
8.11 We include in our Guidelines recommended procedures for reviewing company activity (see Guidelines Section D). Compliance with these Guidelines should ensure that the Institution adequately controls and monitors its liabilities to any related companies.
8.12 Recommendation D14 specifically addresses the quality control concerns noted above.
Other Recommendations
8.13 The technological "spin out" companies, whilst often incurring losses in the development of product, may also have a potentially valuable asset in its rights to intellectual property.
We have found different approaches to the ownership of the intellectual property rights (IPR) across the sector. In some cases the Institution has held title to the IPRs, in others title has belonged to the Company and in one case we have found title remaining with the academics themselves.
The Funding Council has already set out their views on the ownership of IPR via the Generic Research Policy. Although there are no formal rules, the Funding Council encourages Institutions to retain ownership of IPR.
Section Nine
TRANSFER OF PROFITS
Objective9.1 To ascertain how profits from the Related Companies are routed back to the Institution.
Summary
9.2 All the Companies of the Institutions visited routed their profits back to the Institution, to take advantage of its tax exempt status. In all cases this was done properly, in accordance with procedures that were well understood by all concerned.
Criteria
9.3 We sought to establish:
* how profits are routed back to the Institution
(we note that there are three main methods of routing the profits back to the Institution from the Companies as follows: (i) by Deed of Covenant; (ii) by gift aid; (iii) by dividend. Profits are also transferred by management charges and interest on loans);
* whether or not Deeds of Covenant were set up and, if so, whether they were operated properly.
Findings
9.4 The general approach to profits made by the Companies was to return all profits to the Institution, usually by way of covenant for tax efficiency.
9.5 A major funding issue arises from this need to pay over profits to the parent Institution in order to minimise tax liabilities. The subsidiary Company is not given the opportunity to build up its own reserves and therefore any increased requirement for working capital or investment expenditure has to be funded either through external borrowing or by injection of further funds from the Institution.
9.6 When all profits are stripped out and passed back to the parent Institution, Companies can quickly become technically insolvent after a short period of poor trading results, as they have limited reserves. This creates a need for parent Institution support and makes is difficult to borrow funds from external sources without guarantees from the parent Institution which in turn exposes that Institution to further risk.
9.7 Deed of Covenant was the most usual method of transferring profits to the Institution, although one Institution preferred Gift Aid as this was felt to give the Institution greater versatility. There is specific legislation covering Deed of Covenants which ensures such payments are not deemed a distribution of profits and therefore do not incur a tax charge. However no such legislation exists in respect of Gift Aid. Institutions should seek professional advice when considering the most appropriate method of transferring surpluses from the Company to the Institution.
9.8 Dividends were paid when a Company had other third party shareholders. The tax planning in these situations was therefore more complicated as the Company needed to retain sufficient profits to offset against the advanced corporation tax paid.
9.9 All Institutions visited had routed their profits correctly; no errors or mistakes were noted during our discussions.
9.10 Payments in respect of management charges were mostly made to/from Companies at cost. In some cases where the actual cost of the goods or services could not be ascertained an arbitrary charge was made.
9.11 Interest on loans was generally charged at a commercial rate. In one instance, with convertible loan notes, a rate of 5% over base was paid by the company when the Institution borrowed at only 1% over base. At the other extreme we have noted the use of current accounts between the Institution and the subsidiary on which no interest was charged. It is possible that such balances could be left outstanding for long periods and effectively become loans free of interest.
Recommended Practice Guidelines
9.12 We recommend in our Guidelines that the Institution should ensure all profits have been passed back to the parent Institution in accordance with agreed procedures (see Guideline C2).
9.13 We also recommend that a Memorandum account should be maintained by the Institution to note the value of the profits passed back. This Memorandum would assist when assessing the overall financial performance of the company. It might also assist when considering whether or not to invest further funds (see Guideline D11).
Other Recommendations
9.14 We have no other recommendations to make in this section.
Section Ten
COMPLIANCE OF TAX REGULATIONS
Objective10.1 To establish whether the Institution monitors the compliance of its Related Companies with the requirements of the taxation authorities.
Summary
10.2 The Institutions visited satisfactorily monitored the compliance of their Related Companies with the requirements of the taxation authorities. All were familiar with the routines involved and none reported any penalties or fines being charged by the authorities for mis-declarations or late payments. No unprovided tax liabilities were brought to our attention.
Criteria
10.3 We discussed with the Institutions their procedures for ensuring that subsidiaries file the relevant returns for VAT and payroll taxes.
Findings
10.4 Where appropriate, P11Ds were completed. In most cases the Institutions central payroll department carried out this work on behalf of the company.
10.5 Where the Companies prepared their own VAT return, the representatives that we met had a clear understanding of this requirement. Institutions prepared the VAT returns on behalf of many of the Companies. This was always the case for those subsidiaries put in place for VAT planning purposes.
10.6 We found no cases where the Companies had been subject to assessments for incorrect VAT returns.
10.7 We found that employees of the parent Institutions on occasions completed projects on behalf of commercial subsidiaries and were paid part of the resulting proceeds. It may be possible in certain circumstances for such payments to be paid to the individual concerned without deduction of tax as they are regarded as self employed for this purpose.
We suggest that this is an area which requires careful consideration, as the Inland Revenue might seek to infer that such payments are made only as a result of their employment by the Institution.
Recommended Practice Guidelines
10.8 Completion of tax returns should be a matter of routine, and was regarded as such by the Institutions visited.
Other recommendations
10.9 The proper operation of PAYE procedures in the Institutions and their Related Companies was outside the scope of our review. We suggest that the HEFCE, through the CVCP or BUFDG tax groups, might consider developing guidance on payments to Institution staff when acting on consulting assignments or similar work.
Section Eleven
LIABILITY TO EMPLOYEES
Objective11.1 To establish whether the Institution has any liabilities in respect of employees of the Related Companies.
Summary
11.2 We have found no situations where there is likely to be a significant exposure to the Institution as a result of the transfer of its employees to a Company. Where amounts involved may be significant appropriate steps have been taken.
Criteria
11.3 We have sought to establish whether:
* any of the employees of the Companies were formally employed by the Institutions;
* the Institutions has given any guarantees to the employees;
* the Institutions has given any considerations to its responsibilities under the TUPE legislation.
Findings
11.4 Employees of the Companies in most cases had previously been employed by the Institution. Often the contract of employment was still with the Institution with the employees position at the Company being effectively a secondment.
11.5 We found no cases where guarantees had been made to any employees in respect of potential redundancy liabilities or other such costs of the Related Companies.
11.6 In one case where a nursing school was acquired and where a significant number of employees were transferred we noted that appropriate consideration was given to the TUPE legislation. We found no other cases where this legislation would have been of significance.
11.7 No Institution had given formal consideration to the potential costs of redundancies in the event of the company failing. However, the explanation for this was that the amounts involved were unlikely to be significant and that most of the employees involved would be re-employed by the Institution.
Recommended Practice Guidelines
11.8 In our Guidelines we recommend that the potential costs of redundancies and guarantees given are considered by the Institution once the decision to close the Company has been taken (Guideline E1). A provision against these costs may need to be made by the Institution and will be impacted by the contract terms agreed with its employees.
11.9 There is no formal obligation for the Institution to consider the potential costs of Company failure in respect of its liabilities to employees. It would be good practice for this to be considered by the Institution as part of its assessment of risks in determining whether to continue to invest in the company in the future (see Guideline D13)
Other Recommendations
11.10 The TUPE legislation in respect of the transfer of employees is complex. The Funding Council may wish to consider whether further guidance could usefully be given to Institutions to ensure they are fully aware of the potential obligations which may arise as a result of any future transfer of employee contracts.
Section Twelve
PUBLIC ACCOUNTABILITY
Objective12.1 To establish that the Institution has due regard for the issue of public accountability.
Summary
12.2 All Institution were aware of their responsibilities in respect of using public funds. However, further guidance from the Funding Council to formalise the procedures to be used to monitor the issue of public accountability would be of value.
Criteria
12.3 We have sought to establish whether:
* all risks to the Institution through investment in related companies are clearly identified;
* the Company has been adequately financed with no unauthorised HEFCE funds being used;
* there are specific reserves available to finance the Related Companies.
Findings
12.4 All Institutions informed us that they were aware of their responsibilities in respect of the legitimate use of the funds provided by the Funding Council.
12.5 However, the Institutions visited had difficulty in demonstrating conclusively the sources of funding related company activities. We understand that all HEFCE funds were utilised for the purposes for which they were originally awarded, but they noted that if a surplus arose then it was difficult to distinguish the source.
12.6 Certain Institutions, particularly the "New Universities" do not have significant financial reserves. There is therefore a risk that in the event of any significant liabilities falling due they may have insufficient resources to cover.
Recommended Practice Guidelines
12.7 We recommend that the Audit Committee should be given clear terms of reference in respect of the Company (see Guidelines B20 and D6);
12.8 We recommend that the Companies should be included as part of the Institutions internal audit programme and that the results of any such review should be made available to both the Board of the Companies and the Institutions Audit Committee (see Guideline D8).
Other Recommendations
12.9 The Funding Councils Financial Memorandum requires each Institution to ensure:
* that they have a sound system of internal management and control;
* that funds from the Funding Council are only used on the provision of education and undertaking of research, or on facilities and activities which are required for these purposes; and any other conditions which the Funding Council may from time to time prescribe.
We have said above that Institutions are aware of their responsibilities in respect of public funds. However, we have found that the practical application of this understanding varies widely. We suggest that the Funding Council could give useful additional guidance to clarify current practices on the control mechanisms, for example the role of internal audit, to safeguard the use of those funds.
Appendix A
INSTITUTIONS VISITED
EnglandAnglia Polytechnic University
University of Aston
University of Birmingham
Bolton Institute of Higher Education
Buckingham College
Cranfield University
De Montfort University
Edgehill College
University of Lancaster
University of Leeds
University of Liverpool
Loughborough University of Technology
Nottingham Trent University
University of Southampton
Thames Valley University
University of York
Wales
University of Wales College of Cardiff
Scotland
Queen Margaret's College
Appendix B
SCOPE AND METHODOLOGY
IntroductionB.1 We set out below the scope and methodology of our study. These were agreed with the Funding Council before commencement of our work.
B.2 Our study has comprised four main stages. These are as follows:
* desk research;
* Institution visits;
* preparation of Guidelines;
* regional workshops.
In addition we have reported throughout our work to the Technical Panel who have advised and corroborated our work where appropriate.
We discuss each of these stages in more detail below.
Desk research
B.3 The purpose of the desk research was to provide an overview of the Related Companies within the higher education sector in order to provide a platform on which we could base our study.
B.4 Our work comprised:
* a review of the accounts of the Institutions to obtain details of the Related Companies;
* extraction of relevant key information from records maintained at Companies House and recording this information in a data base which we have set up;
* preparing a summary of the information, both by Institution and for the sector as a whole.
B.5 We have only included information available in the public domain. As a result we have had to make certain assumptions in respect of categorising the activities of the Companies. However, it is unlikely that any misclassifications will be sufficiently material to invalidate the conclusions drawn. The most recent information available to us was in respect of the year ended 31 July 1994.
B.6 We have excluded the following from our study:
* Universities of Oxford and Cambridge
* BES companies
In respect of Oxford and Cambridge only the publishing companies are disclosed in their respective accounts. These are of sufficiently different character to other companies in the sector that their inclusion would have significantly distorted our findings. We have also excluded the BES companies as they have been set up for a defined purpose with external parties having significant influence.
Institution visits
B.7 We judgementally selected a sample of Institutions to visit, to include both old and new universities and colleges. Details of the Institutions visited are set out at Appendix A. These Institutions were agreed with the Funding Council. Further visits were also arranged at a later date, at the request of the Technical Panel, to ensure that the SCOP members had been suitably represented.
B.8 The majority of our visits were carried out during April 1995, with the additional visits being carried out in May and June. We used as the basis for our visits a checklist which we include for your information at Appendix C.
B.9 As a result of the information obtained from the site visits, together with our own knowledge from the private sector, we prepared a set of Recommended Practice Guidelines. These were first presented to the Technical Panel on 9 May.
B.10 We set out in Sections Four to Twelve below a summary of our findings from our Institution visits. These are in accordance with the format of the "Site Visit Checklist", shown at Appendix C, and used as the basis for our interviews. This checklist was approved by the Funding Council and the Technical Panel before we commenced our visits.
B.11 In carrying out our study we have given assurances to the Institutions that our interviews would be in confidence, and that we would obtain their prior consent if we were to make any specific disclosures. We therefore make no specific reference to the Institutions in this report.
Preparation of Guidelines
B.12 As a result of our site visits and regional workshops we have met with many Institution officers and discussed their experiences of Related Companies. From these discussions we have drawn up a set of recommended practice guidelines which we believe the Institutions and companies should consider. These Guidelines are shown at Appendix D.
B.13 In many situations the matters contained within the Guidelines will already be standard practice, in others there may be issues which need to be addressed. It is our hope that the Guidelines will provide a useful tool to the sector and allow the standards of control, management and reporting to be further improved.
B.14 The Guidelines are set out in the form of a checklist, in five main sections as follows:
* Preliminary Considerations
* Formation
* Management
* Review
* Exit/realisation of investment
Each checklist is designed to meet the requirements of the Institution/Company at a particular stage of the Company's life cycle.
Regional workshops
B.15 During August 1995 Regional Workshops were held around the country at which Robson Rhodes and HEFCE jointly presented the findings of the study. In addition, further informal presentations have been made at various relevant meetings in Scotland and Wales.
B.16 As a result of these workshops further amendments were made to the Guidelines. The approach has therefore been one of collaboration with the representative bodies and Institutions/Companies as far as practicable.
Technical panel
B.17 The Technical Panel was established to contribute to the study as appropriate and to validate the Guidelines. Representatives from the HEFCE, SCOP, CVCP and Robson Rhodes were on the Panel. The members were:
John Rushforth - HEFCE
James Hunt - CVCP
Richard Aveling - SCOP
James Carty - Robson Rhodes, Head of Technical Department
Eugene Sullivan - Robson Rhodes, Head of Public Sector Services
Clifford Shanbury - Robson Rhodes, Partner (involved with site visits)
In addition to the above, Doctor Ederyn Williams, Chairman of UNICO, also contributed to the final documentary review procedures.
Appendix C
SITE VISIT CHECKLIST
A. INSTITUTION1 Background
AIM: To ensure our information is complete and accurate
1.1 Check completeness of information in respect of the Related Companies controlled by the Institution:
1.1.1 Names
1.1.2 Locations
1.1.3 Key personnel
1.1.4 Turnover
1.1.5 Profitability
1.1.6 Net asset position
1.1.7 Liability to Institution
- Actual
- Contingent
1.2 Is the year end of the Related Companies the same as that for the Institution?
1.3 Has the Institution set up any joint ventures abroad?
2 Establishment
AIM: To determine that the establishment of the Company/group has been properly planned and controlled
2.1 Determine reason for establishment of the related company:
2.1.1 Purpose
- to protect the Institutions charitable status
- to improve the recovery of VAT attaching
to a particular project (if so, are there any
details?)
- for other commercial reasons (what are
they?)
2.1.2 Was professional advice taken?
- legal
- financial (by external auditors,
internal auditors or other third
party)
2.1.3 Was confirmation of the arrangements
received from any statutory body (eg Inland
Revenue, Customs & Excise, Charity
Commissioners)?
2.2 Review Business Plans for each Related Company (if in existence). Consider following information:
2.2.1 Objectives
2.2.2 Approval and authorisation
- was it considered internally (by whom?)
- was it considered externally (by whom?)
2.2.3 Forecast performance - compare with actual
performance if possible
2.2.4 Financing requirements set out in Business
Plan - consider against current situation
3 Governance
AIM: To determine that the Institution exerts appropriate influence over the affairs of the Related Company
3.1 Consider reporting instructions to the Related Company from the Institution:
3.1.1 Does the company report on a regular basis?
If so, how?
3.1.2 Does the Finance Committee have an active
involvement?
3.1.3 Does the Audit Committee have an active
involvement?
3.1.4 Are there reports giving assurance which are
passed to the whole Governing body?
3.1.5 Is there a designated official within the
University who has responsibility for
monitoring the company's performance?
3.1.6 Are management accounts presented to the
Institution on a regular basis?
3.1.7 Are the management accounts reviewed and
acted on?
3.1.8 Are the statutory accounts considered and
approved by the Institution eg by the
Governors?
3.2 Consider adequacy of management of Related Companies:
3.2.1 How many directors of each Company
are there?
- How many are Executives of the
Institution?
- How many are on the Board of Governors?
- How many have no connection with the
Institutions?
3.2.2 How were the Company's directors appointed?
Who was responsible for their selection?
3.2.3 Are directors suitably experienced for the
position?
3.2.4 Are there any non-executive directors?
3.2.5 Are there suitable contracts of employment
with directors? What are the terms of
cancellation of the contract?
3.2.6 Do the Articles specify a period of rotational
retirement?
3.3 Consider basis of remuneration of executive and non-executive officers and directors
3.3.1 Has this been agreed with the Institution?
3.3.2 Is any part of the remuneration profit related?
3.3.3 Is any part of the remuneration geared towards
future equity holdings eg share options?
3.4. What directorial influence does the Institution have over the related company?
3.4.1 Is the Institution represented on the Board of
the companies?
3.4.2 If so, what positions are held by whom?
3.5 Consider directors external interests/potential conflicts
3.5.1 Do the directors of the Related Companies
have interests in any other companies, and if
so do these companies have any direct
involvement with either the Related
Companies or the Institution?
3.5.2 What procedures are there for dealing with
any conflicts of interests for directors of
Related Companies who are also employees
of the University?
4 Performance
AIM: To establish that the Related Companies performance has met its budget and objectives
4.1 How have Companies performed against objectives? (pursue any areas of concern which arise)
4.2 Establish how performance is monitored
4.3 Consider budgets for 1994/95
4.3.1 Have they been agreed with the Institution
and approved?
AIM: To establish that the Related Companies results are a fair reflection of its activities
4.4 Allocation of costs
4.4.1 Do any staff members work on the affairs of
both the Institution and Related Company?
If so, how are costs allocated?
4.4.2 Are any Related Company staff actually paid
in full by the Institution?
4.4.3 Does the Related Company pay rent (or hire
charges) for use of premises or equipment?
Is it at cost or at market value?
AIM To establish that the Institution controls and monitors its liability to the Related Company
4.5 How does the institute view its exposure to its investments? Consider:
4.5.1 Recent trading
4.5.2 Expected future performance
4.5.3 Future financing requirement
4.6 If the Institution has set up any joint ventures abroad (see 1.3 above) what arrangements are there to enable the Institution to monitor their performance, and control any liability it may have?
4.7 How confident is the Institution in the realisability of Related Company assets? In particular consider:
4.7.1 Fixed assets, (eg valuation of property)
4.7.2 Recoverability of debtors (bad debt history)
4.7.3 Recoverability of stock and work in progress
4.8 How does the Institution substantiate the value of research and development?
AIM: To ascertain how profits from the Related Companies are routed back to the Institution
4.9 How are profits routed back to the Institution?
4.9.1 Are dividends paid?
4.9.2 Are any management charges made, and if so
on what basis?
4.9.3 Is interest paid on any loans? If so on what
basis?
4.9.4 Are any services sold to the Institution
- if so what is the basis of the transaction
eg cost or at profit?
4.10 Are there Deeds of covenants set up? What are the operational controls to ensure they are correctly implemented?
4.10.1 What percentage of profits are paid to the
Institution?
4.10.2 Confirm that payments are made pre year
end with the associated basic rate tax
deducted and paid over to the Inland Revenue
by the Companies
4.10.3 Confirm that the Institutions recover the
tax suffered
4.10.4 At what stage is the tax recovered (ie after the
end of the tax year or at an earlier date)
4.10.5 If profits are remitted to the Institution
by way of dividend, when are payments made
to the Institution (eg pre year end; after
profits have been ascertained; regularly
throughout the year)
4.10.6 At what stage does the Institution recover the
ACT suffered.
AIM: To establish whether the Institution monitors the compliance of its Related Companies with the requirements of the taxation authorities
4.11 Do the companies pay tax and VAT liabilities and submit returns as they become due, or have the Companies been subject to interest and/or penalties?
4.11.1 Do the Companies correctly complete forms
P11D?
4.11.2 Are P11D dispensations in place for the
Companies?
4.11.3 Have the Companies been subject to
assessments for incorrect VAT returns?
4.11.4 Are VAT and tax returns checked by an
appropriate officer of the Institution prior
to dispatch to the appropriate Revenue
body?
AIM: To establish whether the Institution has any liabilities in respect of employees of the Related Companies
4.12 Do the Related Companies have any of their own employees?
4.12.1 If so, were any of these employees formerly
employees of the Institution?
4.12.2 Has the Institution given any guarantees in
respect of the redundancy liabilities or
other costs of employees of the Related
Companies?
4.12.3 Has the Institution given any consideration
to its responsibilities under the TUPE
legislation?
AIM: To establish whether there is any taxation exposure for the Institution as a result of the funding arrangements for the Related Companies
4.13 Does the Institution fund the Related Companies by way of loan?
4.13.1 Is the loan documented?
4.13.2 If yes, is the loan short term with constantly
changing balances ie a current account?
4.13.3 If no, what are the current levels of the loans?
4.13.4 For each loan, ascertain:
- the repayment terms
- the security for the loan
- the interest being charged on the loan
Public Accountability
Aim: to establish that the Institution has due regard for issue of public accountability
5.1 Consider potential risks:
5.1.1 Are risks to the Institutions through
investments in Related Company clearly
identified?
5.1.2 What measure have been taken to manage
the exposure?
5.1.3 Is the Institutions exposure clearly
recognised by the Institutions Governors?
5.1.4 Crystallisation of contingent liability - in
particular consider potential funding
requirement and consequent implication for
Public funding.
5.1.5 Are there any other risk/contingent
liabilities other than as disclosed in the
accounts eg covenants/indemnities/
warranties/redundancies etc.
5.2 Consider Related Company funding:
5.2.1 What does funding comprise:
- share capital
- loans
- undrawn profits
5.2.2 How has investment in the Related Company
been financed?
5.2.3 Can you demonstrate that no HEFCE funds
have been used in financing investments?
5.2.4 What controls operate to ensure the legality
of the investments made? (ie investments
made from non-designated funding)
5.2.5 What non specific reserves are available to
finance the Related Companies and do these
exceed the extent of the investment in the
subsidiaries?
6 Audit
AIM: To ensure that there is adequate review of the Institution investment in its Related Company by both the external and internal auditors
6.1 External auditors
6.1.1 Does the Institution Audit Committee have
any oversight of control arrangements in the
Related Companies?
6.1.2 Is the external auditor of the Related Company
the same as the auditor for the Institution?
6.1.3 How do the auditors to the Related Companies
report to the Institution?
6.1.4 Does the Institution receive any external audit
reports or management letters in respect of
the audit of the Related Companies?
6.1.5 Have the auditors of the Institution examined
the Related Companies? Have they satisfied
themselves as to the extent of the exposure
that the Institution is faced with?
6.2 Internal auditors
6.2.1 Have the internal auditors of the Institution
examined the Related Companies and what
have they found?
6.2.2 To whom have they reported their findings?
6.2.3 Have they carried out as a minimum an
assessment of the extent of exposure that the
Institution is faced with?
End of checklist
Related Companies
Appendix D
Recommended Practice Guidelines
This document is maintained as a separate file.Appendix E
SUMMARY OF COMPANY ACTIVITIES
| Sector | Total # of Companies | # of Active Companies | Turnover | Net Profit before Covenant | Net Assets | Institute Liability | |||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 1994 | 1993 | 1994 | 1993 | 1994 | 1993 | 1994 | 1993 | 1994 | 1993 | ||
| Consultancy & Research | 66 | 49 | 44 | 49,974 | 50,018 | 1,995 | 2,173 | 2,019 | 2,088 | 10,515 | 7,955 |
| Conferences/teaching/training | 41 | 33 | 32 | 41,833 | 32,508 | 1,741 | (1,423) | (1,364) | 421 | 11,126 | 8,540 |
| General Trading | 57 | 36 | 33 | 34,040 | 28,155 | 1,555 | 1,703 | 6,475 | 3,381 | 4,414 | 3,875 |
| Utilities | 23 | 16 | 9 | 21,827 | 14,808 | 2,472 | 1,931 | 1,431 | 426 | 6,201 | 5,667 |
| Science Parks | 5 | 2 | 2 | 6,252 | 5,776 | 555 | 68 | 1,035 | 303 | 419 | - |
| Property Management | 33 | 25 | 14 | 9,994 | 7,548 | 7 | 375 | 14,216 | 1,913 | 13,400 | 572 |
| Other | 60 | 8 | 8 | 4,935 | 2,111 | 401 | (642) | 3,458 | 551 | 3,037 | 663 |
| Publishing | 4 | 4 | 3 | 3,368 | 1,769 | 55 | 144 | 318 | 195 | 1,073 | 336 |
| TOTAL | 291 | 173 | 146 | 172,223 | 142,693 | 8,781 | 4,929 | 27,588 | 9,278 | 50,185 | 27,608 |